Key News

Asian equities were mixed as Korea collapsed following retail investors punching out on a coronavirus flare up. Taiwan was lower on the US’ decision to add Huawei affiliates to the restricted entity list. Hong Kong managed a small gain although Huawei suppliers were hit including Sunny Optical -9.45%, BYD Electronic -11.56%, and AAC Technologies -2.46%. Growth names dominated the Hong Kong volume table with Tencent +1.49%, Meituan Dianping +7.7%, Alibaba HK +3.79%, Xiaomi +6.42% and JD.com HK +9.48% after strong results yesterday. Mainland China managed modest gains despite the Huawei news as investors focused on the PBOC’s injection of liquidity into the financial system. The DND trade, drugs/pharma stocks and drinks/alcohol stocks, performed well overnight. Liquor stocks Kweichow Moutai and Wuliangye Yibin rose +0.89% and +3.61%, respectively. A research firm reported that China will grant a patent to CanSino Biologics, which gained +2.62% on the news, and the company’s vaccines will be available by year end.

China’s currency appreciated +0.35% versus the US dollar in trading this morning. As I have noted previously, I believe the currency is a better bellwether for the potential market impact of any political action than stock prices. Headlines tend to move stocks in an exaggerated fashion as algorithms and high frequency trading computers are programmed to trade on the news. One publicly traded market making firm involved in high frequency trading grew revenues +243% in Q1 and +180% in Q2. US-China headlines shake investors out of stocks, which are then bought by trading firms, which, in turn, are able to sell them once markets rally. An institutional broker with a US wealth management arm noted that Alibaba was sold heavily yesterday by the firm’s retail investors. Selling Alibaba two days before their earnings release? Selling the stock just as Alibaba is being added to the Hang Seng Index at month end? Crazy. Check out CNY next time before making an emotional investment decision when the next headline drops.

H-Share Update

The Hang Seng gave up morning gains to close +0.08%/+20 index points at 25,367 as volume was off -1.45%, which is just above the 1-year average. Breadth was off with 21 advancers and 26 decliners led by Tencent +1.49%/+42 index points, Sunny Optical -9.45%/-27 index points and China Mobile +2.13%/+23 index points. China-domiciled companies rose +0.38% compared to Hong Kong-domiciled companies, which fell -0.21%, using the HS China Enterprise and HK 35 Indexes as proxies. The 205 Chinese companies listed in Hong Kong within the MSCI China All Shares Index +1.23% with discretionary +4.25%, health care +2.54%, staples +1.8%, communication +1.6%, materials +1.54%, tech +0.18%, industrials -0.03%, financials -0.07%, real estate -0.33%, and energy -0.33%.

Southbound Stock Connect volumes were light in mixed trading. Shanghai Connect volume leaders were Xiaomi, which was bought 6 to 5, Tencent, which was bought 2 to 1, and Meituan Dianping, which was bought 3 to 2. Mainland investors bought $138mm worth of Hong Kong stocks today as Southbound Connect trading accounted for nearly 11% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen grinded higher +0.36% and +0.49% to close at 3,451 and 2,298, respectively. Volumes were off -6%, but were 30% above the 1-year average while breadth was mixed with 1,936 advancers and 1,650 decliners. Small caps outperformed large and mid caps. The 510 Mainland stocks within the MSCI China All Shares Index gained +0.55% with health care +1.78%, materials +1.5%, staples +1.47%, communication +0.83%, industrials +0.63%, discretionary +0.45%, energy +0.45%, utilities +0.08%, tech -0.19%, financials -0.37%, and real estate -0.69%.

Northbound Stock Connect volumes were moderate in mixed trading. Shanghai Connect volume leaders were Ping An, which was sold slightly, China Tourism, which was sold 3 to 2, and Jiangsu Hengrui Medicine, which was bought 2 to 1. Shenzhen Stock volume leaders were BOE Technology, which was sold slightly, CATL, which was sold 7 to 6, and East Money Information, which was bought 2 to 1. Foreign investors sold -$294mm worth of Mainland stocks as Northbound Stock Connect trading accounted for 5% of Mainland turnover.  

Last Night’s Exchange Rates & Yields

• CNY/USD 6.92 versus 6.93 yesterday
• CNY/EUR 8.26 versus 8.23 yesterday
• Yield on 1-Day Government Bond 1.22% versus 1.33% yesterday
• Yield on 10-Year Government Bond 2.98% versus 2.94% yesterday
• Yield on 10-Year China Development Bank Bond 3.47% versus 3.44% yesterday